Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,900 and has $351,600 of accumulated depreciation to date, with a new machine that has a purchase price of $484,200. The old machine could be sold for $64,100. The annual variable production costs associated with the old machine are estimated to be $156,400 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,100 per year for eight years. a. 1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "O". If required, use a minus sign to indicate a loss. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) May 29 Continue Replace with Old Old Differential Machine Machine Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine $ Costs: Purchase price Variable productions costs (8 years) Profit (Loss) a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation? The sunk cost is $ Check My Work 2 more Check My Work uses remaining. < Previous Next

Answer 1

A.1: Differential Analysis Alternative I   Alternative II   Differential

Continue with   Replace the       Effect

Old Machine    Old Machine (II-I)

Revenue:

Revenue from Sale of Old Machine 0 64100 64100

Cost:

Purchase Cost 0 484200 484200

Variable Production (8 Years) 1251200 800800 -450400

Total Cost 1251200 1285000 33800

Profit / (Loss) (1251200) (1220900) 30300

Incremental Profit = $30300

A.2: Alternative II Replace the Old Machine is beneficial as Incremental Profit is $30300

B: Sunk Cost is Book Value of Old Machine = 600900-351600

= $249300